Fracking Seen Robbing OPEC of Gasoline Pricing Power

The success of American drillers in coaxing fossil fuels from shale rock has the potential to boost production so much that it may deny OPEC the power to set global oil and gasoline prices, an intelligence advisory panel concluded.

Daniel Yergin, chairman of IHS Cambridge Energy Research Associates, talks about China’s growing energy demand and the development of shale-gas production. Yergin speaks with Tom Keene and Sara Eisen on Bloomberg Television’s “Surveillance.” Stephen Roach, a professor at Yale University and former non-executive chairman for Morgan Stanley in Asia, also speaks.

Rising domestic production from hydraulic fracturing is expanding U.S. supplies, which would shift the balance of power in global energy markets, according to the report by the National Intelligence Council released today. The council, an adviser to the director of national intelligence, publishes a report every four years to aid policymakers’ long-term planning.

As the U.S. adds supply, the Organization of Petroleum Exporting Countries’ influence over prices would wane, according to the report that echoes previous studies that project benefits from a drill process known as fracking.

“In a tectonic shift, energy independence is not unrealistic for the U.S. in as short a period as 10-20 years,” the report states.

President Barack Obama is promoting development of natural gas and crude oil as an economic resource, and formed a task force this year to avoid federal rules that would slow fracking. The administration is considering limits on the process as environmentalists say injecting water, sand and chemicals underground to free trapped gas and oil poses a threat to clean water supplies.

The intelligence analysis says concern about the environmental impacts is the “greatest obstacle” to fracking.

‘Close Loopholes’

“A tighter regulatory environment — which is beginning to happen in some U.S. states — could also close loopholes and reassure public safety,” the report states.

The 12 nations of OPEC, including Saudi Arabia, Iraq and Venezuela produce more than 40 percent of the world’s oil, a volume that gives its production decisions influence over the crude prices, the single largest contributor to gasoline costs. Oil prices quadrupled in 1974 after OPEC blocked shipments to the U.S. in retaliation for the U.S. re-supplying Israel’s military during a war with its Arab neighbors.

Additional production could significantly cut oil prices, increase U.S. economic activity by more than 2 percent and add 3 million jobs by 2030.

Total global crude output would exceed demand by more than 8 million barrels a day, at which point OPEC would lose price control and crude oil prices would collapse, according to the report.

“OPEC’s production levels are one of the key variables in world energy prices,” Daniel Yergin vice chairman of IHS Inc. an Englewood, Colorado, based consultancy group, said in an interview before the report was published. “If there is more oil in a well-supplied market, prices would be lower than they would be in a tight market.”

Output Doubles

The National Intelligence Council’s report reiterates recent estimates that U.S. oil production may expand to 15 million barrels a day, more than double current output, and enough to make the nation “a major energy exporter” by 2020.

Additional production could significantly cut oil prices, increase U.S. economic activity by more than 2 percent and add 3 million jobs by 2030, the report states.

Drillers including Exxon Mobil Corp. and Chesapeake Energy Corp. are using fracking to unlock once inaccessible reserves of oil and natural gas in the shale formations of North Dakota, Texas, Pennsylvania and Ohio.

The International Energy Agency predicted last month that the U.S. would overtake Saudi Arabia as the biggest crude-oil producer by 2020. Citigroup Inc. in a March report said increasing U.S. and Canadian production would make North America energy independent by 2020.

An Energy Department analysis released last week concluded the U.S. had a sufficient supply of natural gas to make it a major exporter of the fuel.

The Energy Information Administration, which tracks and analyzes energy data, is less optimistic about the expansion of U.S. production, though it also predicts growth.

Rising Output

The U.S. produced about 5.6 million barrels a day of oil in 2011, according to the EIA.

By 2019, daily crude oil production will reach 7.5 million barrels, the agency said in its 2013 energy outlook. So far in 2012, the production has averaged about 6.3 million barrels.

The analysis from the intelligence council says continued technological advances in drilling could push production beyond the government’s expectations.

Yergin, whose book “The Quest” examines the shale revolution, said while the U.S. isn’t likely to achieve full energy independence, it will become less dependent on nations outside Canada as production increases and new fuel efficiency standards moderate demand.

“”So far, increasing output keeps outpacing the projection, and we do think we’ll add a lot of supply,” Yergin said. “But the reason you work with alternative scenarios is because the world doesn’t necessarily move in a straight line.”